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Public investment, not austerity, is road to recovery

Date Published: 05/17/2012

Author: Dane Smith, President


Expectations were extremely low for the 2012 Minnesota Legislature. Yet here and there in the cloud’s lining are more than a few silver strands, representing investment in human and physical capital, and advancement of public good.

To wit:

Bipartisan agreement was reached on legislation that expands career and technical post-secondary options for 10th-graders, giving them an earlier start on the pathway to a technical or vocational career. And the education omnibus bill contains modest funding for home nursing visits for at-risk new parents, which can help supplement much-needed new early childhood education investment from federal Race to the Top grants.

The new Vikings stadium is not even close to the best possible investment for some $500 million in state and city money. But the deal includes a requirement that boosts the percentage of minority workers hired for the project. That’s bound to help at least a little in a Twin Cities region with some of the highest racial unemployment gaps in the nation.

The bonding bill lacks funding for a southwest suburban light rail spoke, something our business leaders strongly supported. And there should have been more for the economy-driving University of Minnesota. But it was more than the bare bones (or nothing at all) favored by some anti-government legislators. And public housing advocates are pleased with more than $37 million for housing and the homeless, including dollars to address the foreclosure calamity, to conduct public housing rehabilitation and to improve the Harriet Tubman Center East domestic violence shelter.

The best silver strand of all is what didn’t happen: Constitutional amendments placing new and arbitrary restrictions on taxes and budgets, designed to permanently cripple our ability to invest for public good, never got off the ground. Despite promises to get those measures on the ballot, proposals such as a 60 percent majority requirement for enacting any tax rate increase went nowhere.

And that’s largely because these notoriously clumsy and destructive amendments got the thumbs down from key business organizations, from editorial pages in greater Minnesota and from responsible conservative organizations such as the Minnesota Taxpayers Association.

The session brought to the fore a deep schism in the GOP majority caucuses, which Star Tribune columnist Lori Sturdevant described as a difference between "strong-Tea" and "weak-Tea" Republicans. That’s catchy but not quite fair to the faction that turned out to be stronger (and more rational).

This fundamental difference is between the libertarian zealots who favor less government, come hell or high water, even if it harms business, and the real-world, business-minded conservatives who recognize the value of public investments, economic security and human capital.

Going forward, with a long-term structural deficit looming and a need to raise public revenues and to redesign public systems in good faith, we can only hope the reasonable people continue to prevail.

One of the most luminous of the reasonable minds among international economists is Joseph Stiglitz, a Nobel Prize winner whose textbook on public sector economics was required for a graduate economics class (taught by a conservative) when I was at Stanford University on a fellowship in the early 1990s.

In 2008, Stiglitz wrote a brilliant essay on how democracies needed to respond to growing inequality — and this was even before the most calamitous free-market pratfall of our times, the bursting of the speculative asset bubbles that sent unemployment soaring and government revenues plummeting.

Stiglitz wrote then that "trickle-down economics does not work: An increase in GDP can actually leave most citizens worse off. America’s recent growth was neither economically sustainable nor inclusive. Most Americans are worse off today [August 2008] than they were seven years ago."

"There need not be a trade-off between inequality and growth," Stiglitz wrote, long before the rise of "the 99 percent."

"Governments can enhance growth by increasing inclusiveness. A country’s most valuable resource is its people. So it is essential that everyone can live up to their potential, which requires education opportunities for all."

In his essay, Stiglitz explained that government plays a vital role in promoting development, "providing infrastructure and education, developing technology and even acting as an entrepreneur" and noting that government laid the foundation for the Internet and the modern biotechnology revolution.

Wisdom like Stiglitz’s about the value of aggregate demand — making sure that workers have enough money and economic security to buy the products they are producing — is as old as super-capitalist Henry Ford’s defense of high pay for his factory workers more than a century ago.

Stiglitz was right then, and he’s right now. Earlier this month his syndicated column warned against nations and states continuing to impose "austerity" on their masses, instead of raising taxes on the increasingly wealthy and investing for public good and economic growth.

"This we should know by now: Markets on their own are not stable," Stiglitz wrote. "Not only do they repeatedly generate destabilizing asset bubbles, but, when demand weakens, forces that exacerbate the downturn come into play. … States with balanced budget frameworks are forced to cut spending as tax revenues fall — an automatic destabilizer that Europe seems mindlessly bent on adopting."

For the more wonky and scientific students of economics, I highly recommend further reading of Stiglitz, and likewise a recent report by Josh Bivens of the Economic Policy Institute that summarizes new research quantifying the value of public investment.

The value of short-term public investment for economic recovery is frequently debated, Bivens concluded, "but there is also an enormous amount of economic evidence demonstrating that public investment is a significant long-run driver of productivity growth — and hence growth in average living standards."

Bivens adds this startling conclusion: "In fact, the new research shows that public investment is at least as productive as private, and several strands of the research seem to indicate that it is substantially more productive."



A version of this column originally appeared in the St. Paul Legal Ledger Capitol Report on Thursday, May 17, 2012.

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